- 17% of European pensions schemes considering financial impact of climate change, a three-fold increase from those surveyed in 2017
- Regulatory nudges encouraging investors to consider the physical and policy risks posed by climate change
Mercer’s 2018 European Asset Allocation Report reveals that more European pension funds are considering the investment risks posed by climate change. Seventeen percent of the 912 participants in Mercer’s 2018 survey stated that they now consider the investment risks posed by climate change, up from 5% in Mercer’s 2017 survey and 4% in 2016. This more than triple increase comes as NASA has confirmed that April 2018 was the third warmest April since modern record keeping began in 1880.
The 2018 survey – the 16th edition - gathered information from institutional investors across 12 countries, reflecting total assets of around €1.1 trillion. In addition to investment strategy information, the report also explores the drivers behind Environmental, Social and Corporate Governance (ESG) integration and a few key areas within responsible investment: investor stewardship, active ownership rights and finally, the investment risks and opportunities posed by climate change.
According to Phil Edwards, Mercer’s Global Director of Strategic Research, “Nudges by the UK’s Pensions Regulator, the EU Commission and the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) are driving increased engagement. However, at 17% of respondents, there is further to go in terms of serious investor engagement on this issue. We expect the industry-led approach of the TCFD to continue to drive awareness of the issue.”
Kate Brett, Principal in Mercer’s Responsible Investment Team, said: “A proactive approach to consideration of environmental issues can open up investment opportunities in the green fields of the low carbon economy, while inactivity by pension schemes brings risks from stranded assets and physical climate risks, as well as reputational risk. Given increasing regulatory involvement and public concern about climate change, it may be that in time a lack of consideration of ESG risks will be seen as a breach of fiduciary duty. We continue to work with our clients to help them integrate consideration of ESG within their decision-making processes.”
Mercer’s 2018 survey (See Chart 1) found that 34% of survey participants cited regulatory drivers as the key factor in encouraging them to consider ESG risks. Twenty-five percent of respondents cited the financial materiality of ESG risks. The views of individual trustees and reputational risks were both cited as drivers by 18% of respondents. Ten percent cited the need to align the investment strategy with their sponsor’s Corporate Social Responsibility Strategy.
In 2015, ahead of the global climate negotiations in Paris, Mercer published Investing in a Time of Climate Change, a report outlining four plausible climate change scenarios (considering warming levels by the end of the century from 2˚C to 4˚C) and the impact that each scenario could have on investment returns. The report found that the biggest impacts were under a 2˚C scenario and crucially that long-term investors could position their portfolios for such a scenario without materially reducing expected returns. A new edition of the report is due to be published later this year.
Mercer’s report comes on the back of a study published on the 25 April by the House of Commons Environmental Audit Committee investigating the approach taken towards climate risk by 25 of the largest UK pension funds.
Notes to Editors
Chart: What/Who is the key driver behind the consideration of ESG risks?
Note: Please note that options are not exclusive, with some asset owners motivated by a combination of reasons.
Note: The TCFD was formed in following the Paris agreement which came in to force in November 2016 and set an ambitious target to keep warming below 2° C. Their mission is to develop recommendations for voluntary climate-related financial disclosures that are consistent, comparable, reliable, clear, and efficient, and provide decision-useful information to lenders, insurers, and investors.
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